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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-4346
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2418067
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE
HEREOF, 1,000 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE,
WERE ISSUED AND OUTSTANDING.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
AVAILABLE ON THE WEB @ WWW.CITIGROUP.COM.
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2003
PAGE
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three and six months ended June 30, 2003 and 2002 1
Condensed Consolidated Statements of Financial Condition -
June 30, 2003 (Unaudited) and December 31, 2002 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 30, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 21 - 22
Item 6. Exhibits and Reports on Form 8-K 22 - 23
Exhibit Index 23
Signatures 24
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Investment banking $ 1,065 $ 958 $ 1,892 $ 1,874
Commissions 936 1,003 1,759 1,958
Asset management and administration fees 795 956 1,593 1,878
Principal transactions 620 56 1,241 663
Other 68 78 95 74
- --------------------------------------------------------------------------------------------------------------------
Total non-interest revenues 3,484 3,051 6,580 6,447
- --------------------------------------------------------------------------------------------------------------------
Interest and dividends 2,113 2,483 4,145 4,714
Interest expense 1,377 1,702 2,749 3,255
- --------------------------------------------------------------------------------------------------------------------
Net interest and dividends 736 781 1,396 1,459
- --------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 4,220 3,832 7,976 7,906
- --------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 2,269 2,100 4,304 4,357
Floor brokerage and other production 180 182 338 326
Communications 168 162 335 314
Occupancy and equipment 135 139 271 266
Professional services 97 69 177 122
Advertising and market development 69 77 129 146
Other operating and administrative expenses 96 114 178 184
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 3,014 2,843 5,732 5,715
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,206 989 2,244 2,191
Provision for income taxes 467 370 855 819
- --------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 739 619 1,389 1,372
Cumulative effect of change in accounting principle
(net of tax benefit of $16 ) - - - (24)
- --------------------------------------------------------------------------------------------------------------------
Net income $ 739 $ 619 $ 1,389 $ 1,348
====================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
Dollars in millions 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and cash equivalents $ 3,694 $ 3,722
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,826 2,461
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $104,467 $94,775
Deposits paid for securities borrowed 54,896 45,439
-------- -------
159,363 140,214
Financial instruments owned and contractual commitments:
(Approximately $38 billion and $34 billion were pledged to various
parties at June 30, 2003 and December 31, 2002, respectively)
U.S.government and government agency securities 36,333 34,610
Corporate debt securities 23,664 17,597
Contractual commitments 17,375 15,788
Non-U.S. government and government agency securities 12,831 9,989
Equity securities 12,797 9,531
Mortgage loans and collateralized mortgage obligations 8,047 7,512
Money market instruments 4,724 6,565
Other financial instruments 7,955 6,548
-------- -------
123,726 108,140
Receivables:
Customers 23,607 16,439
Brokers, dealers and clearing organizations 20,922 8,776
Other 3,204 2,858
-------- -------
47,733 28,073
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,093 and
$1,048, respectively 1,500 1,025
Goodwill 1,530 1,530
Intangibles 805 808
Other assets 5,952 6,018
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $347,129 $291,991
====================================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
Dollars in millions, except share data 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 23,790 $ 22,619
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $120,976 $118,878
Deposits received for securities loaned 19,863 10,439
-------- --------
140,839 129,317
Financial instruments sold, not yet purchased, and
contractual commitments:
Non-U.S. government and government agency securities 22,931 21,783
U.S. government and government agency securities 18,091 13,133
Contractual commitments 16,738 14,821
Corporate debt securities and other 11,498 7,697
Equity securities 4,856 4,243
-------- --------
74,114 61,677
Payables and accrued liabilities:
Customers 27,299 16,724
Brokers, dealers and clearing organizations 21,092 5,074
Other 12,957 11,320
-------- --------
61,348 33,118
Term debt 32,911 32,302
Company-obligated mandatorily redeemable securities
of subsidiary trust holding solely junior subordinated debt
securities of the Company - 400
Stockholder's equity:
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 3,547 3,016
Retained earnings 10,585 9,543
Accumulated changes in equity from nonowner sources (5) (1)
-------- --------
Total stockholder's equity 14,127 12,558
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $347,129 $291,991
====================================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
Dollars in millions
Six Months Ended June 30, 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,389 $ 1,348
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 146 164
Cumulative effect of change in accounting principle - 24
Net change in:
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (365) 1,871
Securities borrowed or purchased under agreements to resell (19,149) (15,302)
Financial instruments owned and contractual commitments (15,586) (5,888)
Receivables (19,660) 14,677
Goodwill, intangibles and other assets, net 469 2,250
Securities loaned or sold under agreements to repurchase 11,522 17,774
Financial instruments sold, not yet purchased, and contractual commitments 12,437 (3,061)
Payables and accrued liabilities 28,230 (16,272)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (567) (2,415)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in commercial paper and other short-term borrowings 1,171 1,911
Proceeds from issuance of term debt 8,086 5,944
Term debt maturities and repurchases (7,856) (4,567)
Repayment of mandatorily redeemable securities of subsidiary trust (400) -
Capital contribution from Parent 500 -
Dividends paid (347) (640)
Other capital transactions - 4
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,154 2,652
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Property, equipment and leasehold improvements, net (615) (86)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (615) (86)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (28) 151
Cash and cash equivalents at January 1, 3,722 3,018
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30, $ 3,694 $ 3,169
=======================================================================================================================
Interest paid did not differ materially from the amount of interest expense
recorded for financial statement purposes.
The Company paid cash for income taxes, net of refunds, of $471 million during
the six months ended June 30, 2003 and paid cash for income taxes, net of
refunds of $1,163 million during the six months ended June 30, 2002.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements reflect the accounts of
Citigroup Global Markets Holdings Inc. (formerly, Salomon Smith Barney Holdings
Inc.) ("CGMHI"), a New York corporation, and its subsidiaries (collectively, the
"Company"). The Company is a wholly owned subsidiary of Citigroup Inc. Material
intercompany transactions have been eliminated.
The condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of management's best judgment and estimates. Estimates,
including the fair value of financial instruments and contractual commitments,
the outcome of litigation, realization of deferred tax assets and other matters
that affect the reported amounts and disclosures of contingencies in the
condensed consolidated financial statements, may vary from actual results. The
condensed consolidated financial statements are unaudited; however, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in CGMHI's Annual
Report on Form 10-K for the year ended December 31, 2002.
Certain financial information that is normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, but that is not required for interim reporting
purposes, has been condensed or omitted.
ACCOUNTING CHANGES
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations and
certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
142"), as required for goodwill and indefinite-lived intangible assets resulting
from business combinations consummated after June 30, 2001. The new rules
require that all business combinations consummated after June 30, 2001 be
accounted for under the purchase method. The nonamortization provisions of the
new rules affecting goodwill and intangible assets deemed to have indefinite
lives are effective for all purchase business combinations completed after June
30, 2001.
On January 1, 2002, the Company adopted the remaining provisions of SFAS 142,
when the rules became effective for calendar year companies. Under the new
rules, effective January 1, 2002, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized, but are subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives.
There was no impairment of goodwill upon adoption of SFAS 142. The adoption
resulted in a cumulative adjustment of $24 million (net of tax benefit of $16
million) reported as a charge to earnings related to the impairment of certain
intangible assets related to the Asset Management segment.
5
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
that a liability for costs associated with exit or disposal activities, other
than in a business combination, be recognized when the liability is incurred.
Previous generally accepted accounting principles provided for the recognition
of such costs at the date of management's commitment to an exit plan. In
addition, SFAS 146 requires that the liability be measured at fair value and be
adjusted for changes in estimated cash flows.
The provisions of the new standard are effective for exit or disposal activities
initiated after December 31, 2002. The impact of adopting SFAS 146 was not
material.
GUARANTEES AND INDEMNIFICATIONS
On January 1, 2003, the Company adopted the recognition and measurement
provisions of Financial Accounting Standards Board ("FASB") Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), which
requires that, for guarantees within the scope of FIN 45 issued or amended after
December 31, 2002, a liability for the fair value of the obligation undertaken
in issuing the guarantee be recognized. The impact of adopting FIN 45 was not
material.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This Interpretation changes the method
of determining whether certain entities, including securitization entities,
should be included in the Company's consolidated financial statements. An entity
is subject to FIN 46 and is called a variable interest entity ("VIE") if it has
equity that is insufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties, or equity
investors that cannot make significant decisions about the entity's operations,
or that do not absorb the expected losses or receive the expected returns of the
entity. All other entities are evaluated for consolidation in accordance with
SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." A VIE is
consolidated by its primary beneficiary, which is the party involved with the
VIE that has a majority of the expected losses or a majority of the expected
residual returns or both.
The provisions of FIN 46 are to be applied immediately to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains an interest after
that date. For VIEs in which an enterprise holds a variable interest that it
acquired before February 1, 2003, FIN 46 applies in the first fiscal period
beginning after June 15, 2003. For any VIEs that must be consolidated under FIN
46 that were created before February 1, 2003, the assets, liabilities and
noncontrolling interest of the VIE would be initially measured at their carrying
amounts with any difference between the net amount added to the balance sheet
and any previously recognized interest being recognized as the cumulative effect
of an accounting change. If determining the carrying amounts is not practicable,
fair value at the date FIN 46 first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE.
The Company is evaluating the impact of applying FIN 46 to existing VIEs in
which it has variable interests and has not yet completed this analysis. The
Company is restructuring certain VIEs to enable them to meet
6
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the criteria for non-consolidation. At this time, it is anticipated that the
effect on the Company's condensed consolidated statement of financial condition
could be an increase of as much as $2.5 billion to both assets and liabilities.
As the Company continues to evaluate the impact of applying FIN 46, additional
entities may be identified that would need to be consolidated by the Company.
STOCK-BASED COMPENSATION
On January 1, 2003, the Company adopted the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"),
prospectively to all awards granted, modified, or settled after January 1, 2003.
The prospective method is one of the adoption methods provided for under SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
issued in December 2002. SFAS 123 requires that compensation cost for all stock
awards be calculated and recognized over the service period (generally equal to
the vesting period). This compensation cost is determined using option pricing
models, intended to estimate the fair value of the awards at the grant date.
Similar to Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", the alternative method of accounting, an offsetting
increase to stockholder's equity under SFAS 123 is recorded equal to the amount
of compensation expense charged.
Had the Company applied SFAS 123 in accounting for the Company's stock option
plans for all options granted, net income would have been the pro forma amounts
indicated below:
- --------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period ended June 30, 2003 2002 2003 2002
- --------------------------------------------------------------------------------------
Compensation expense
related to stock option As reported $ 7 $ - $ 11 $ -
plans, net of tax Pro forma 34 47 68 89
Net income As reported 739 619 1,389 1,348
Pro forma 712 572 1,332 1,259
======================================================================================
The Company, through its parent, has made changes to various stock-based
compensation plan provisions for awards granted in 2003. For example, the
vesting period and the term of stock options granted after 2002 have been
shortened to three and six years, respectively. In addition, the sale of
underlying shares acquired through the exercise of options granted in 2003 is
restricted for a two-year period. The Company, through its parent, continues its
existing stock ownership commitment for senior executives, which requires
executives to retain at least 75% of the shares they own and acquire from the
Company, subject to certain minimum ownership guidelines, over the term of their
employment. Original option grants in 2003 and thereafter will not have a reload
feature; however, previously granted options will retain that feature. Other
changes may also be made that may impact the expense recognized under SFAS 123.
7
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. In particular, SFAS 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 and is not expected to have a material
impact on the Company's condensed consolidated financial statements.
LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer measures certain financial
instruments with characteristics of both liabilities and equity and classifies
them in its statement of financial position. It requires that an issuer classify
a financial instrument that is within its scope as a liability (or an asset in
some circumstances) when that financial instrument embodies an obligation of the
issuer. SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS 150 is not expected to have a
material impact on the Company's condensed consolidated financial statements.
NOTE 2. COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and other changes in
stockholder's equity from nonowner sources, which, for the Company, are
comprised of cumulative translation adjustments, net of tax:
- --------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period ended June 30, 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
Net income $ 739 $ 619 $ 1,389 $ 1,348
Other changes in equity from
nonowner sources (1) 5 (4) 5
- --------------------------------------------------------------------------------------------
Total comprehensive income $ 738 $ 624 $ 1,385 $ 1,353
============================================================================================
8
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to securities and commodities
regulations and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. Capital
requirements related to CGMHI's principal regulated subsidiaries at June 30,
2003 are as follows:
NET EXCESS OVER
(DOLLARS IN MILLIONS) CAPITAL (U.S.) OR MINIMUM
SUBSIDIARY JURISDICTION FINANCIAL RESOURCES (U.K.) REQUIREMENTS
- --------------------------------------------------------------------------------------------------------------------------------
Citigroup Global Markets Inc. U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $3,326 $2,715
Citigroup Global Markets Limited United Kingdom's Financial Services Authority $3,273 $ 566
- ---------------------------------------------------------------------------------------------------------------------------------
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc.
("Swapco"), an indirect wholly owned subsidiary of CGMHI, must maintain minimum
levels of capital in accordance with agreements with its rating agencies. At
June 30, 2003, Swapco was in compliance with all such agreements. Swapco's
capital requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
9
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. CONTRACTUAL COMMITMENTS
Contractual commitments used for trading purposes include derivative instruments
such as interest rate, equity, currency and commodity swap agreements, swap
options, caps and floors, options, warrants and financial commodity futures and
forward contracts. The fair values (unrealized gains and losses) associated with
contractual commitments are reported net by counterparty, provided a legally
enforceable master netting agreement exists, and are netted across products and
against cash collateral when such provisions are stated in the master netting
agreement. Contractual commitments in a net receivable position, as well as
options owned and warrants held, are reported as assets in "Contractual
commitments." Similarly, contractual commitments in a net payable position, as
well as options written and warrants issued are reported as liabilities in
"Contractual commitments." Revenues generated from these contractual commitments
are reported primarily as "Principal transactions" and include realized gains
and losses as well as unrealized gains and losses resulting from changes in the
market or fair value of such instruments.
A summary of the Company's contractual commitments as of June 30, 2003 and
December 31, 2002 is as follows:
JUNE 30, 2003 DECEMBER 31, 2002
--------------------------------------- --------------------------------------
Notional Current Market or Notional Current Market or
or Contractual Fair Value or Contractual Fair Value
Amounts ----------------------- Amounts -----------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in billions Assets Liabilities Assets Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
Exchange-traded products:
Futures contracts (a) $ 285.0 $ - $ - $ 192.2 $ - $ -
Other exchange-traded products:
Equity contracts 47.5 2.8 2.9 50.8 1.4 2.0
Fixed income, foreign exchange and commodity
contracts 15.2 - - 9.5 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total exchange-traded products 347.7 2.8 2.9 252.5 1.4 2.0
- ------------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options,
caps, floors and forward rate agreements:
Swaps 2,092.7 2,567.7
Swap options written 68.4 60.1
Swap options purchased 60.8 52.7
Caps, floors and forward rate agreements 171.0 181.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps, floors and
forward rate agreements (b) 2,392.9 11.5 9.3 2,862.4 11.9 9.4
- ------------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity
indices 91.5 1.5 3.5 73.5 1.1 2.4
Options and forward contracts on fixed-income
securities 792.1 .9 .3 628.7 .8 .4
Foreign exchange contracts and options(b) 105.1 .6 .6 58.7 .5 .5
Commodity contracts 9.4 .1 .1 9.2 .1 .1
- ------------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $ 3,738.7 $ 17.4 $ 16.7 $ 3,885.0 $ 15.8 $ 14.8
====================================================================================================================================
(a) Margin on futures contracts is included in receivable/payables to brokers,
dealers and clearing organizations on the condensed consolidated statements
of financial condition.
(b) Includes notional values of swap agreements and forward currency contracts
for non-trading activities (primarily related to the Company's fixed-rate
long-term debt) of $14.0 billion and $5.2 billion at June 30, 2003,
respectively, and $14.3 billion and $4.1 billion at December 31, 2002,
respectively.
10
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. SEGMENT INFORMATION
The following table summarizes the results of operations for the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
- ------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense:
Investment Services $ 2,537 $ 1,987 $ 4,747 $ 4,270
Private Client Services 1,431 1,536 2,740 3,029
Asset Management 252 309 489 607
- ------------------------------------------------------------------------------------------------------------------
Total $ 4,220 $ 3,832 $ 7,976 $ 7,906
==================================================================================================================
Total non-interest expenses:
Investment Services $ 1,712 $ 1,473 $ 3,222 $ 3,023
Private Client Services 1,153 1,191 2,221 2,351
Asset Management 149 179 289 341
- ------------------------------------------------------------------------------------------------------------------
Total $ 3,014 $ 2,843 $ 5,732 $ 5,715
==================================================================================================================
Net Income:
Investment Services $ 505 $ 322 $ 947 $ 782
Private Client Services 171 218 319 429
Asset Management 63 79 123 137
- ------------------------------------------------------------------------------------------------------------------
Total $ 739 $ 619 $ 1,389 $ 1,348
==================================================================================================================
Total assets of the Investment Services, Private Client Services and Asset
Management segments were $333.4 billion, $12.0 billion and $1.7 billion,
respectively, at June 30, 2003 and $278.5 billion, $11.9 billion and $1.6
billion, respectively, at December 31, 2002. For further discussion of the
Company's operating segments, please refer to the Results of Operations section
of Management's Discussion and Analysis.
11
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. LEGAL PROCEEDINGS
For a discussion of certain legal proceedings, see Part II, Item 1 of this Form
10-Q. In addition, in the ordinary course of business, the Company and its
subsidiaries are defendants or co-defendants or parties in various litigation
and other regulatory matters incidental to and typical of the business in which
they are engaged. In connection with its discontinued commodities processing
operations, the Company and certain of its subsidiaries are subject to claims
asserted by the U.S. Environmental Protection Agency, certain state agencies and
private parties in connection with environmental matters. In the opinion of the
Company's management, the ultimate resolution of these legal and regulatory
proceedings would not be likely to have a material adverse effect on the
consolidated financial condition of the Company but, if involving monetary
liability, may be material to the Company's operating results for any particular
period.
NOTE 7. OBLIGATIONS UNDER GUARANTEES
The Company provides a variety of guarantees and indemnifications to customers
to enhance their credit standing and enable them to complete a wide variety of
business transactions. The Company believes the guarantees which are provided
relate to an asset, liability, or equity security of the guaranteed parties.
In the normal course of business, the Company provides standard representations
and warranties to counterparties in contracts in connection with numerous
transactions and also provides indemnifications that protect counterparties to
contracts in the event that additional taxes are owed due either to a change in
the tax law or an adverse interpretation of the tax law. Counterparties to these
transactions provide the Company with comparable indemnifications. In addition,
the Company is a member of numerous value transfer networks ("VTNs") (payment,
clearing and settlement systems as well as securities exchanges) around the
world. As a condition of membership, many of these VTNs require that members
stand ready to backstop the net effect on the VTNs of a member's default on its
obligations. The indemnification clauses are often standard contractual terms
and were entered into in the normal course of business based on an assessment
that the risk of loss would be remote. In many cases, there are no stated or
notional amounts included in the indemnification clauses and the contingencies
triggering the obligation to indemnify have not occurred and are not expected to
occur. There are no amounts reflected on the accompanying condensed consolidated
statement of financial condition as of June 30, 2003, related to these
indemnifications.
Derivative instruments which include guarantees are credit default swaps, total
return swaps, written foreign exchange options, written put options, written
equity warrants, and written caps and floors. At June 30, 2003, the carrying
amount of the liabilities related to these derivatives was $2 billion.
The maximum potential loss represents the amounts that could be lost under the
guarantees if there were a total default by the guaranteed parties, without
consideration of possible recoveries under recourse provisions or from
collateral held or pledged. Such amounts bear no relationship to the anticipated
losses on these guarantees and greatly exceed anticipated losses. At June 30,
2003, the maximum potential loss at notional value related to credit default
swaps and total rate of return swaps amounted to $45 billion, of which $5.5
billion expire within one year and $39.5 billion expire after one year. At June
30, 2003, the maximum potential loss at fair value related to derivative
guarantees other than credit default swaps and total rate of return swaps
amounted to $2.3 billion.
12
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Guarantees to joint ventures and other third parties primarily include
guarantees of their debt obligations. At June 30, 2003, the carrying amounts of
the liabilities and the maximum potential loss related to these joint venture
and other third party guarantees were $510 million, of which $385 million
expires within one year and $125 million expires after one year. Securities and
other marketable assets held as collateral to reimburse losses under other third
party guarantees amounted to $23 million at June 30, 2003.
Guarantees of collection of contractual cash flows protect investors in
securitization trusts from loss of principal and interest relating to
insufficient collections on the underlying receivables in the trust. At June 30,
2003, the carrying amounts of the liabilities and the maximum potential loss
related to guarantees of collection of contractual cash flows were $24 million.
13
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
SETTLEMENT OF CERTAIN LEGAL AND REGULATORY MATTERS
On July 28, 2003, Citigroup entered into a final settlement agreement with the
Securities and Exchange Commission ("SEC") to resolve the SEC's outstanding
investigations into Citigroup transactions with Enron and Dynegy. Pursuant to
the settlement, Citigroup has, among other terms, (1) consented to the entry of
an administrative cease and desist order, which bars Citigroup from committing
or causing violations of provisions of the federal securities laws, and (2)
agreed to pay $120 million ($101.25 million allocable to Enron and $18.75
million allocable to Dynegy). Citigroup entered into this settlement without
admitting or denying any wrongdoing or liability, and the settlement does not
establish wrongdoing or liability for purposes of any other proceeding. On July
28, 2003, Citibank, N.A. entered into an agreement with the Office of the
Comptroller of the Currency ("OCC") and Citigroup entered into an agreement with
the Federal Reserve Bank of New York ("FED") to resolve their inquiries into
certain of Citigroup's transactions with Enron. Pursuant to the agreements,
Citibank and Citigroup have agreed to submit plans to the OCC and FED,
respectively, regarding the handling of complex structured finance transactions.
Also on July 28, 2003, Citigroup entered into a settlement agreement with the
Manhattan District Attorney's Office to resolve its investigation into certain
of Citigroup's transactions with Enron; pursuant to the settlement, Citigroup
has agreed to pay $25.5 million and to abide by its agreements with the SEC, OCC
and FED. The Company and certain other Citigroup subsidiaries had previously
established a reserve for the cost of these settlements.
RESULTS OF OPERATIONS
For the three months ended June 30, 2003 (the "2003 Quarter"), the Company
recorded net income of $739 million compared to $619 million for the three
months ended June 30, 2002 (the "2002 Quarter"). Revenues, net of interest
expense, were $4,220 million in the 2003 Quarter compared to $3,832 million in
the 2002 Quarter. Principal transactions revenues increased significantly to
$620 million in the 2003 Quarter compared to $56 million in the 2002 Quarter
primarily as the result of an increase in fixed income trading. Investment
banking revenues increased in the 2003 Quarter to $1,065 million as the result
of increases in high yield and high grade debt underwritings offset by declines
in merger and acquisition fees. Commission revenues declined in the 2003 Quarter
to $936 million as a result of a decline in listed commissions. Asset management
and administration fees declined to $795 million as the result of market
weakness and declines in fees from managed accounts. Net interest and dividends
decreased to $736 million in the 2003 Quarter primarily as a result of a
decrease in mortgage-backed trading interest. Total non-interest expenses
increased 6% in the 2003 Quarter to $3,014 million as a result of increased
production-related compensation and benefits expense.
For the six months ended June 30, 2003 (the "2003 Period"), the Company recorded
net income of $1,389 million compared to $1,348 million for the six months ended
June 30, 2002 (the "2002 Period"). Revenues, net of interest expense, were
$7,976 million in the 2003 Period compared to $7,906 million in the 2002 Period.
Principal transactions revenues increased significantly to $1,241 million in the
2003 Period compared to $663 million in the 2002 Period primarily as the result
of an increase in fixed income trading. Commission revenues decreased to $1,759
million primarily as a result of a decrease in listed commissions. Asset
management and administration fees decreased 15% primarily as a result of market
weakness and declines in fees from managed accounts. Net interest and dividends
decreased to $1,396 million in the 2003 Period primarily as a result of a
decrease in mortgage-backed trading interest. Total non-interest expenses in the
2003 Period were essentially unchanged when compared to the 2002 Period.
In the 2002 Period, the Company recorded a cumulative after-tax loss of $24
million (net of tax benefit of $16 million) which related to the adoption of
Statement on Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".
14
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is a discussion of the results of operations of the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
INVESTMENT SERVICES
- -------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $2,537 $1,987 $4,747 $4,270
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expense 1,712 1,473 3,222 3,023
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 825 514 1,525 1,247
Provision for income taxes 320 192 578 465
- -------------------------------------------------------------------------------------------------------------------
Net income $ 505 $ 322 $ 947 $ 782
===================================================================================================================
The Company's Investment Services segment recorded net income in the 2003
Quarter of $505 million and $947 million in the 2003 Period, compared to $322
million and $782 million in the 2002 Quarter and the 2002 Period, respectively.
Revenues, net of interest expense, increased 28% and 11% to $2.5 billion and
$4.7 billion in the 2003 Quarter and the 2003 Period, respectively. Principal
transactions revenues increased significantly in the 2003 Quarter and 2003
Period as a result of an increase in fixed income trading. Commission revenues
decreased in the 2003 Quarter and the 2003 Period as a result of a decrease in
listed commissions. Investment banking revenues increased in the 2003 Quarter as
a result of increases in high yield and high grade debt underwritings, offset by
a decline in merger and acquisition fees. In the 2003 Period, investment banking
revenues were essentially unchanged. Included in investment banking revenues in
the 2002 Period were fees from the Travelers Property Casualty Corp. initial
public offering.
Total non-interest expenses increased to $1.7 billion and $3.2 billion in the
2003 Quarter and the 2003 Period, respectively, primarily due to an increase in
production-related compensation and benefits expense, partially offset by
reduced floor brokerage and other production expenses.
PRIVATE CLIENT SERVICES
- -------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $1,431 $1,536 $2,740 $3,029
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expense 1,153 1,191 2,221 2,351
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 278 345 519 678
Provision for income taxes 107 127 200 249
- -------------------------------------------------------------------------------------------------------------------
Net income $ 171 $ 218 $ 319 $ 429
===================================================================================================================
15
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Private Client Services net income was $171 million in the 2003 Quarter, down
$47 million or 22% from the prior year, primarily due to lower asset-based fee
revenue and a decline in net interest revenue from securities-based lending,
partially offset by an increase in transaction volumes, lower production-related
compensation, and the impact of continued expense control initiatives. Net
income declined in the 2003 Period primarily due to lower asset-based fee
revenue along with lower transactional volumes.
Revenues, net of interest expense, of $1,431 million in the 2003 Quarter and
$2,740 million in the 2003 Period decreased $105 million or 7% and $289 million
or 10%, respectively, from the prior-year periods. The decrease in the 2003
Quarter primarily reflects declines in fees from managed accounts and lower net
interest revenue on security-based lending, partially offset by higher
commissions and other transactional revenue. The decrease in the 2003 Period was
primarily due to lower asset-based fee revenue along with lower transactional
volumes.
Total assets under fee-based management were $182.4 billion as of June 30, 2003,
up $11.7 billion or 7% from June 30, 2002, primarily due to an increase in
market values and positive net flows. Total client assets, including assets
under fee-based management, were $959 billion as of June 30, 2003, an increase
of $27 billion or 3% compared to the 2002 Quarter. This increase was principally
due to market appreciation and positive net flows. Net flows were $9 billion in
the 2003 Quarter, maintaining the same level as the prior year period.
Operating expenses of $1,153 million in the 2003 Quarter and $2,221 million in
the 2003 Period, decreased 3% and 6%, respectively, from the prior-year periods,
primarily reflecting lower production-related compensation resulting from a
decline in revenue combined with the impact of expense control initiatives.
Assets under fee-based management were as follows:
- ---------------------------------------------------------------------------------------
Dollars in billions
At June 30, 2003 2002
- ---------------------------------------------------------------------------------------
Financial Consultant managed accounts $ 60.9 $ 54.7
Consulting Group and internally managed assets 121.5 116.0
- ---------------------------------------------------------------------------------------
Total assets under fee-based management (1) $182.4 $170.7
- ---------------------------------------------------------------------------------------
(1) Includes certain assets managed jointly with Citigroup Asset Management.
16
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT
- ---------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $252 $309 $489 $607
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 149 179 289 341
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 103 130 200 266
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes 40 51 77 105
Cumulative effect of change in accounting
principle (net of tax benefit of $16) - - - (24)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 63 $ 79 $123 $137
=====================================================================================================================
The Company's Asset Management segment revenues, net of interest expense,
decreased to $252 million and $489 million in the 2003 Quarter and 2003 Period,
respectively, compared to $309 million and $607 million in the 2002 Quarter and
2002 Period, respectively. The primary revenue for the Asset Management segment
is asset management and administration fees, which decreased to $244 million and
$478 million in the 2003 Quarter and 2003 Period, respectively, compared to $300
million in the 2002 Quarter and $588 million in the 2002 Period, respectively.
The decrease in revenues in the 2003 Quarter and 2003 Period reflects the impact
of market weakness, reduced fee revenues and the impact of outflows of U.S.
retail money market funds. The reduced fee revenues primarily resulted from
changes in product mix and revenue sharing arrangements with internal Citigroup
distributors and a change in the presentation of certain fee sharing
arrangements which decreased both revenues and expenses by $11 million and $20
million in the 2003 Quarter and 2003 Period, respectively.
Assets under management for the segment were $264.6 billion at June 30, 2003,
compared to $270.2 billion at June 30, 2002. This decrease is primarily due to
the net outflows of U.S. retail money market funds, which includes the transfer
of assets to the Smith Barney Bank Deposit Program. These decreases were
partially offset by positive market action and positive net flows.
Total noninterest expenses were $149 million and $289 million in the 2003
Quarter and 2003 Period, respectively, compared to $179 million and $341 million
in the 2002 Quarter and 2002 Period, respectively. The decrease in expenses is
due to reduced compensation and benefits expense and the change in the
presentation of certain fee sharing arrangements.
17
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Assets under fee-based management were as follows:
- ------------------------------------------------------------------------------------
Dollars in billions
At June 30, 2003 2002
- ------------------------------------------------------------------------------------
Money market funds $ 87.0 $ 98.8
Mutual funds 77.5 71.4
Managed accounts 94.8 93.9
Unit investment trusts held in client accounts 5.3 6.1
- ------------------------------------------------------------------------------------
Total Citigroup Asset Management $264.6 $270.2
- ------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $347 billion at June 30, 2003, an increase from
$292 billion at year-end 2002. Due to the nature of the Company's trading
activities, it is not uncommon for the Company's asset levels to fluctuate from
period to period.
The Company's condensed consolidated statement of financial condition is highly
liquid, with the vast majority of its assets consisting of marketable securities
and collateralized short-term financing agreements arising from securities
transactions. The highly liquid nature of these assets provides the Company with
flexibility in financing and managing its business. The Company monitors and
evaluates the adequacy of its capital and borrowing base on a daily basis in
order to allow for flexibility in its funding, to maintain liquidity, and to
ensure that its capital base supports the regulatory capital requirements of its
subsidiaries.
The Company funds its operations through the use of collateralized and
uncollateralized short-term borrowings, long-term borrowings, and its equity.
Collateralized short-term financing, including repurchase agreements and secured
loans, is the Company's principal funding source. Such borrowings are reported
net by counterparty, when applicable, pursuant to the provisions of Financial
Accounting Standards Board Interpretation 41, "Offsetting of Amounts Related to
Certain Repurchase and Reverse Repurchase Agreements" ("FIN 41"). Excluding the
impact of FIN 41, short-term collateralized borrowings totaled $222.0 billion at
June 30, 2003. Uncollateralized short-term borrowings provide the Company with a
source of short-term liquidity and are also utilized as an alternative to
secured financing when they represent a less expensive source. Sources of
short-term uncollateralized borrowings include commercial paper, unsecured bank
borrowings and letters of credit, deposit liabilities, promissory notes and
corporate loans. Short-term uncollateralized borrowings totaled $23.1 billion at
June 30, 2003. On March 3, 2003, the Company redeemed for cash all of the
mandatorily redeemable securities of SSBH Capital I, a wholly-owned subsidiary
trust, at the redemption price of $25 per preferred security plus any accrued
interest and unpaid distributions thereon.
The Company has a $4.85 billion 364-day committed uncollateralized revolving
line of credit with unaffiliated banks. Commitments under this facility
terminate in May 2004. Any borrowings under this facility would mature in May
2006. The Company also has a $125 million committed uncollateralized 364-day
facility with an unaffiliated bank that extends through May 2004, with any
borrowings under this facility maturing in May 2005, and a $100 million 364-day
collateralized facility that extends through December 2003. The Company may
borrow under these revolving credit facilities at various interest rate options
(LIBOR or base rate), and
18
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
compensates the banks for these facilities through facility fees. At June 30,
2003, there were no outstanding borrowings under these facilities. The Company
also has committed long-term financing facilities of $1.7 billion with
unaffiliated banks which were fully drawn at June 30, 2003. A bank can terminate
its facility by giving the Company prior notice (generally one year). The
Company compensates the banks for the facilities through facility fees. Under
all of these facilities, the Company is required to maintain a certain level of
consolidated adjusted net worth (as defined in the agreement). At June 30, 2003,
this requirement was exceeded by approximately $6.0 billion. The Company also
has substantial borrowing arrangements consisting of facilities that the Company
has been advised are available, but where no contractual lending obligation
exists. These arrangements are reviewed on an ongoing basis to ensure
flexibility in meeting the Company's short-term requirements.
The Company's borrowing relationships are with a broad range of banks, financial
institutions and other firms, including affiliates, from which it draws funds.
The volume of the Company's borrowings generally fluctuates in response to
changes in the level of the Company's financial instruments, commodities and
contractual commitments, customer balances, the amount of securities purchased
under agreements to resell, and securities borrowed transactions. As the
Company's activities increase, borrowings generally increase to fund the
additional activities. Availability of financing to the Company can vary
depending upon market conditions, credit ratings and the overall availability of
credit to the securities industry. The Company seeks to expand and diversify its
funding mix as well as its creditor sources. Concentration levels for these
sources, particularly for short-term lenders, are closely monitored both in
terms of single investor limits and daily maturities.
The Company monitors liquidity by tracking asset levels, collateral and funding
availability to maintain flexibility to meet its financial commitments. The
Company's liquidity management process includes a contingency funding plan
designed to ensure adequate liquidity even if access to unsecured funding
sources is severely restricted or unavailable. This plan is reviewed
periodically to keep the funding options current and in line with market
conditions. The management of this plan includes an analysis used to determine
the Company's ability to withstand varying levels of stress, including ratings
downgrades, which could impact its liquidation horizons and required margins. In
addition, the Company monitors its leverage and capital ratios on a daily basis.
RISK MANAGEMENT
MARKET RISK
Measuring market risk using statistical risk management models has recently
become the main focus of risk management efforts by many companies whose
earnings are exposed to changes in the fair value of financial instruments.
Management believes that statistical models alone do not provide a reliable
method of monitoring and controlling risk. While Value at Risk ("VAR") models
are relatively sophisticated, they are of limited use for internal risk
management because they do not give any indication of the direction or magnitude
of individual risk exposures or which market scenarios represent the largest
risk exposures. These models are used by the Company only as a supplement to
other risk management tools.
The following table shows the results of the Company's VAR analysis, which
includes all of the Company's financial assets and liabilities which are marked
to market at June 30, 2003 and December 31, 2002. The VAR relating to accrual
portfolios has been excluded from this analysis.
19
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
RISK EXPOSURES June 30, Second Quarter Second Quarter Second Quarter December 31,
($ IN MILLIONS) 2003 2003 Average 2003 High 2003 Low 2002
- --------------------------------------------------------------------------------------------------------------------------
Interest rate $81 $71 $ 96 $56 $63
Equities 18 15 22 9 12
Commodities 6 6 10 3 5
Currency 5 5 9 3 4
Diversification Benefit (21) (24) N/A N/A (18)
- --------------------------------------------------------------------------------------------------------------------------
Total* $89 $73 $ 96 $58 $66
==========================================================================================================================
* Includes diversification benefit.
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at June 30, 2003, the Company simulates changes
in market factors by using historical volatilities and correlations and assuming
lognormal distributions for changes in each market factor. VAR is calculated at
the 99% confidence level, assuming a static portfolio subject to a one-day
change in market factors. The historical volatilities and correlations used in
the simulation are calculated using a look back period of three years. The
Company is in the middle of a large-scale, long-term process of calculating its
VAR by a more robust methodology. Approximately 65% of the total portfolio is
calculated under the new methodology, which simulates tens of thousands of
market factors to measure VAR. The previous methodology simulated fewer market
factors to measure VAR. VAR reflects the risk profile of the Company at June 30,
2003, and is not a predictor of future results.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: changes in
economic conditions, including the performance of global financial markets, and
risks associated with fluctuating currency values and interest rates;
competitive, regulatory or tax changes that affect the cost of or the demand for
the Company's products; the impact of the implementation of new accounting
rules; and the resolution of legal proceedings and environmental matters.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information supplements and amends our discussion set forth under
Part I, Item 3 "Legal Proceedings" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as updated by our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003 and our Current Report on Form
8-K dated April 28, 2003.
ENRON
On July 28, 2003, Citigroup entered into a final settlement agreement with the
Securities and Exchange Commission ("SEC") to resolve the SEC's outstanding
investigations into Citigroup transactions with Enron and Dynegy. Pursuant to
the settlement, Citigroup has, among other terms, (1) consented to the entry of
an administrative cease and desist order, which bars Citigroup from committing
or causing violations of provisions of the federal securities laws, and (2)
agreed to pay $120 million ($101.25 million allocable to Enron and $18.75
million allocable to Dynegy). Citigroup entered into this settlement without
admitting or denying any wrongdoing or liability, and the settlement does not
establish wrongdoing or liability for purposes of any other proceeding. On July
28, 2003, Citibank, N.A. entered into an agreement with the Office of the
Comptroller of the Currency ("OCC") and Citigroup entered into an agreement with
the Federal Reserve Bank of New York ("FED") to resolve their inquiries into
certain of Citigroup's transactions with Enron. Pursuant to the agreements,
Citibank and Citigroup have agreed to submit plans to the OCC and FED,
respectively, regarding the handling of complex structured finance transactions.
Also on July 28, 2003, Citigroup entered into a settlement agreement with the
Manhattan District Attorney's Office to resolve its investigation into certain
of Citigroup's transactions with Enron; pursuant to the settlement, Citigroup
has agreed to pay $25.5 million and to abide by its agreements with the SEC, OCC
and FED.
Additional Actions
Several additional actions, previously identified, have been consolidated with
the Newby action and are stayed, except with respect to certain discovery, until
after the Court's decision on class certification. In addition, on April 17,
2003, an action was brought by two investment firms in connection with purchases
of Osprey Trust certificates for alleged violations of federal securities laws
and state securities and other laws. Also, in July 2003, an action was brought
by purchasers in the secondary market of Enron bank debt against Citigroup,
Citibank, Citigroup Global Markets Inc. ("CGMI"), and others, alleging claims
for common law fraud, conspiracy, gross negligence, negligence and breach of
fiduciary duty.
RESEARCH
On June 23, 2003, the West Virginia Attorney General filed an action against
CGMI and nine other firms that were parties to the April 28, 2003 settlement
with the SEC, the National Association of Securities Dealers ("NASD"), the New
York Stock Exchange ("NYSE") and the New York Attorney General (the "Research
Settlement"). The West Virginia Attorney General alleges that the firms violated
the West Virginia Consumer Credit and Protection Act in connection with their
research activities and seeks monetary penalties.
21
In May 2003, the SEC, NYSE and NASD issued a subpoena and letters to CGMI
requesting documents and information with respect to their continuing
investigation of individuals in connection with the supervision of the research
and investment banking departments of CGMI. Other parties to the Research
Settlement have received similar subpoena and letters.
In April 2003, to effectuate the Research Settlement, the SEC filed a Complaint
and Final Judgment in the United States District Court for the Southern District
of New York. The Final Judgment has not yet been entered by the court, and the
court has asked for certain additional information. Also in April 2003, the NASD
accepted the Letter of Acceptance, Waiver and Consent entered into with CGMI in
connection with the Research Settlement; and in May 2003, the NYSE advised CGMI
that the Hearing Panel's Decision, in which it accepted the Research Settlement,
had become final. CGMI is currently in discussion with various of the states
with respect to completion of the state components of the Research Settlement.
Payment will be made in conformance with the payment provisions of the Final
Judgment.
WORLDCOM, INC.
On May 19, 2003, the motion to dismiss the amended complaint in the WorldCom,
Inc. Securities Litigation was denied.
DYNEGY INC.
On June 6, 2003, the complaint in a pre-existing putative class action pending
in the United States District Court for the Southern District of Texas, brought
by purchasers of publicly traded debt and equity securities of Dynegy Inc., was
amended to add Citigroup, Citibank and CGMI, as well as other banks, as
defendants. The plaintiffs allege violations of the federal securities laws
against the Citigroup defendants.
ADELPHIA COMMUNICATIONS CORPORATION
On July 6, 2003, an adversary proceeding was filed by the Official Committee of
Unsecured Creditors on behalf of Adelphia against certain lenders and investment
banks, including CGMI, Citibank, N.A., Citicorp USA, Inc., and Citigroup
Financial Products, Inc. (together, the Citigroup Parties). The Complaint
alleges that the Citigroup Parties and numerous other defendants committed acts
in violation of the Bank Company Holding Act and the common law. The complaint
seeks equitable relief and an unspecified amount of compensatory and punitive
damages.
In addition, Salomon Smith Barney Inc. (predecessor of Citigroup Global Markets
Inc.) is among the underwriters named in numerous civil actions brought to date
by investors in Adelphia debt securities in connection with Adelphia securities
offerings between September 1997 and October 2001. Three of the complaints also
assert claims against Citigroup Inc. and Citibank, N.A. All of the complaints
allege violations of federal securities laws, and certain of the complaints also
allege violations of state securities laws and the common law. The complaints
seek unspecified damages.
OTHER
MKP MASTER FUND, LDC ET AL. V. SALOMON SMITH BARNEY INC.
In July 2003, CGMI's motion for summary judgment was granted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
On April 7, 2003, the Company filed a Current Report on Form 8-K, dated April 7,
2003, (a) reporting under Item 5 thereof that it had filed a Restated
Certificate of Incorporation with the Secretary of State of the State of New
York changing its name from Salomon Smith Barney Holdings Inc. to Citigroup
Global Markets Holdings Inc. and (b) filing as an exhibit under Item 7 thereof
its Restated Certificate of Incorporation.
On April 14, 2003, the Company filed a Current Report on Form 8-K, dated April
14, 2003, reporting under Item 5 thereof the results of its operations for the
three-month periods ended March 31, 2003 and 2002.
On April 28, 2003, the Company filed a Current Report on Form 8-K, dated April
28, 2003, (a) reporting under Item 5 thereof the settlement by Citigroup Global
Markets Inc. (formerly Salomon Smith Barney Inc.) with the SEC, the NASD, the
NYSE and the New York Attorney General of all outstanding investigations into
research, IPO allocation and distribution practices and (b) filing as an exhibit
under Item 7 thereof a copy of the related
22
press release dated April 28, 2003.
On April 30, 2003, the Company filed a Current Report on Form 8-K, dated April
24, 2003, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's Stock Market Upturn Notes based upon the Dow Jones
Industrial Average Due April 29, 2005.
On June 2, 2003, the Company filed a Current Report on Form 8-K, dated May 27,
2003, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's 7.0% Select Equity Indexed Notes based upon the common
stock of Intel Corporation due May 27, 2005.
On June 30, 2003, the Company filed a Current Report on Form 8-K, dated June 24,
2003, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's Equity Linked Securities (ELKS) based upon the common
stocks of five companies due June 28, 2004.
No other reports on Form 8-K were filed during the second quarter of 2003,
however:
On July 14, 2003, the Company filed a Current Report on Form 8-K, dated July 11,
2003, filing as an exhibit under Item 7 thereof the Global Selling Agency
Agreement relating to the offer and sale of the Company's Medium-Term Senior
Notes, Series A, and Medium-Term Subordinated Notes, Series B.
On July 15, 2003, the Company filed a Current Report on Form 8-K, dated July 14,
2003, reporting under Item 5 thereof the results of its operations for the
three- and six-month periods ended June 30, 2003 and 2002.
On July 31, 2003, the Company filed a Current Report on Form 8-K, dated July 25,
2003, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's 8% Select Equity Indexed Notes based upon the common stock
of Texas Instruments Incorporated due July 25, 2005.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.01 Restated Certificate of Incorporation of Citigroup Global Markets Holdings Inc. (the
"Company"), effective April 7, 2003, incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed on April 7, 2003 (File No. 1-4346).
3.02 By-Laws of the Company, incorporated by reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-3 (No. 333-106272).
12.01+ Computation of ratio of earnings to fixed charges.
31.01+ Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.02+ Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01+ Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- --------------------
+ Filed herewith.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the SEC upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
--------------------------------------
(Registrant)
Date: August 13, 2003 By: /s/ Robert Druskin
------------------------------------------
Robert Druskin
President and Chief Executive Officer
By: /s/ John C. Morris
------------------------------------------
John C. Morris
Chief Financial Officer
24